Seminar: Volatility Uncertainty and the Cross-Section of Option Returns


Department of Systems Engineering and Engineering Management

The Chinese University of Hong Kong

Title: Volatility Uncertainty and the Cross-Section of Option Returns

Speaker: Prof. Jie (Jay) Cao, The Chinese University of Hong Kong

Abstract: This paper studies the relation between the uncertainty of volatility, measured as the volatility of volatility, and future delta-hedged equity option returns. We find that delta-hedged option returns consistently decrease in uncertainty of volatility. Our results hold for different measures of volatility such as implied volatility, EGARCH volatility from daily returns, and realized volatility from high-frequency data. The results are robust to firm characteristics, stock and option liquidity, volatility characteristics, jump risks, and are not explained by common risk factors. Our findings suggest that option dealers charge a higher premium for single-name options with high uncertainty of volatility, because these stock options are more difficult to hedge.

Biography: Prof. Jie (Jay) Cao is an Associate Professor in Department of Finance, The Chinese University of Hong Kong (CUHK) Business School. 
He received his PhD in Finance from University of Texas at Austin in 2009 and BA in Economics from Peking University in 2002. His research areas are empirical asset pricing, derivatives, and behavioural finance. His research specifically focuses on the return predictability and quantitative trading strategies using stocks and stock options. His papers are published or forthcoming in Journal of Financial Economics, Journal of Financial and Quantitative Analysis, and Management Science. His works has been presented in major finance conferences such as American Finance Association annual meeting, European Finance Association annual meeting, and The Financial Intermediation Research Society Conference, and conferences held by institutions such as Federal Deposit Insurance Corporation (FDIC), Deutsche Bank, and Macquarie Group. He has also been invited by industry professionals for presentation such as Morgan Stanley, Two Sigma, Cubist Systematic Strategies, and Yinghua Fund Management. His papers have received several awards such as the Chicago Quantitative Alliance Academic Competition Research Paper Award. He is the Principal Investigator of several Hong Kong competitive RGC grants and many other research grants from both academic and industry sponsors such as Montreal Institute of Structured Finance and Derivatives. He teaches undergraduate Investments and PhD Empirical Asset Pricing, and has received Faculty Outstanding Teaching Award. He has also provided consulting services for several fintech startups and hedge funds.

Friday, November 2, 2018 - 16:30 to 17:30